SmartFinancial Inc (SMBK) 2020 Q3 法說會逐字稿

Good morning, everyone, and welcome to the SmartFinancial Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please also note, today's event is being recorded.

At this time, I'd like to turn the conference call over to Miller Welborn. Sir, please go ahead.

Thanks, Jamie. Good morning, and thanks to each of you for joining us this morning for our Q3 2020 earnings call. It's always a pleasure to visit about SmartBank and talk about our company. Joining me on the call today are Billy Carroll, our President and CEO; Ron Gorczynski, our CFO; and Rhett Jordan, our Chief Credit Officer.

Before we get started, I'd like to refer you all to Page 2 of our deck for the normal and customary disclaimers and forward-looking statements comments. Please take a minute to review these.

First, I know that many parts of our country are still suffering from the effects of COVID. I do want to say that I hope that all parts of the U.S. recover quickly. We're fortunate that our Southeastern markets are all open for business and for the most part, our markets are very busy. We must remain diligent to protect the health of all of our clients, friends, team members and family members. I do appreciate the efforts being made by our SmartBank team members to serve our clients well during this trying time.

We finished third quarter really strong and improved most of all of our metrics. We continue to execute our strategic plan very well in order to become a top-tier performer.

A couple of highlights for our Q3. Net income of $6.4 million and operating earnings of $6.6 million. Tangible book value increased 7 -- to $17.27, and that's a 5.5% year-over-year increase. Our deposits grew tremendously from year-end 2019. So far, they've risen $604 million for the year or 29.5%. Our COVID-modified loans decreased during the third quarter by 62%. That's decreased by 62%. Our total NPA has improved to just 18 bps, down from 28 bps at quarter end Q2.

We're extremely happy and comfortable with where our bank is and our loan portfolio is as we sit here today. Our team has done an in-depth scrub of our book, and we feel very strongly about where we stand.

With that, I'm going to turn it over to Billy and let him jump into some of the details.

Thanks, Miller. We again had a, as Miller said, another really solid quarter, really steady, given the current environment where we're operating. I'm going to hit on a couple of areas, and I'm going to turn it over to Ron to dive into financials and then on over to Rhett to jump into credit.

First, as Miller alluded to, obviously, we're continuing to deal with pandemic and all these challenges, but we've seen most of our markets performing really well. I want to spend a lot of time on that. But you'll note on Page 5 in the deck, we continue to keep this situation front of mind. And that said, we're working to minimize those issues as we get back on offense.

A few of the highlights for the quarter. Total net revenue continues to climb, exceeding $30 million for the period. We had another quarter of stellar deposit growth, increasing over $112 million. Clients continue to hold cash, and we've utilized this time to work on moving core relationships we picked up through the PPP process.

Rhett will speak to this a little more in a moment, but as we have communicated and anticipated, COVID modifications have dropped significantly and we are seeing no concern on the credit front. This is evidenced by our nonperforming asset ratio dropping to 0.18%. I will also note that Progressive Bank deal that closed earlier in the year is now fully integrated and most -- and just really all of those cost saves have been realized, and we're on target.

Jumping into financials, you'll see in the quarterly highlights on Page 7 of the deck. Net income for the quarter was $6.4 million from a GAAP standpoint and operating net income of $6.6 million. $0.44 a quarter -- that makes a $0.44 per share operating quarter, even with the continued reserve build of $2.6 million due to the market uncertainty. The markets did tighten -- our margins did tighten as we expected, and that was influenced by heavy liquidity and PPP loans. The loan balances core remained fairly stable, which was a nice win given the current climate.

We reported a solid pretax pre-provision quarter coming in at $11.3 million. That's a pretax pre-provision ROA of 1.35% annualized. This earnings trajectory has a nice trend line, and is shown on Slide 8 of the deck. We also had record noninterest income for the quarter, coming in at over $4.1 million. Ron is going to touch on this more in a moment, but this is a focus area for us where we're starting to see real results, another really good trend line there.

I've got a few other comments as to what I expect as we move into the last quarter of the year. But again, steady results from SMBK this quarter.

Let me turn it over to Ron for financials and then Rhett for a portfolio on credit, and then I'll close with those comments. Ron?

Thanks, Billy, and good morning, everyone.

Let's start with Slide 9, performance trends. We have experienced continuous growth over the last 8 quarters, but during 2020, our growth was stimulated by the excess liquidity that entered the market as well as us completing an acquisition. For the current quarter, as loan balances remain stable, our liquid cash increased over $142 million. This was primarily driven from the liability side of the balance sheet, where we had deposits grow over $112 million.

Moving on to Slide 10. This is an interesting slide. The green line represents our operating pretax preprovision returns, and for the most part, have been directionally consistent. We are sustaining our profitability. Our operating ROA metrics have been a little more volatile due to our continued reserve build. Both metrics are filling the effects of our temporary asset inflation and headwinds caused by our margin depression.

Turning to Slide 11. As Miller indicated, we have continued our consistent trends of value creation with our book value and tangible book value growth. On the lower graph, our operating efficiency ratio was at 62% as we are consistently maintaining the low 60% range.

Turning to Slide 12, net interest income. For the quarter, our net interest income increased $297,000 to $26 million, when compared to the prior linked quarter. As our interest income remained relatively stable, with increased earning asset volume being offset by declining yields, we experienced decreases in our interest expense with growth in our interest-bearing liabilities at reduced funding levels. Our tax equivalent net interest margin for the quarter was 3.39%, a decline of 24 basis points when compared to the prior quarter.

Our yield on loans for the current quarter was 4.71% compared to 4.87% for the prior quarter. Included in the loan yield for the current quarter was $960,000 of loan discount accretion and we recorded a like level of PPP accretion, which totaled $1.8 million. With our increased level of PPPP (sic) [PPP] accretion for the quarter, the overall effects of the PPP program had very little effect to our margin. For our interest-bearing liabilities, we had a decrease of 12 basis points to 0.59%, and our overall cost of deposits decreased 10 basis points to 0.44%.

For the fourth quarter, we still see some smaller opportunities for further rate reductions in our interest-bearing deposits with over 15% of our time deposits maturing and repricing. As you can see with our liquidity and funding sources at the bottom right of the slide, during this COVID-19 time, we have continued to experience a elevated amount of excess liquidity. Our cash at the Fed and correspondent banks experienced an average growth of $141 million for the current quarter. This liquidity build have negatively impacted our margin by 15 basis points.

With all of this excess liquidity, in early October, we decided to pay down the Fed's PPPLF funding facility in the amount of $238 million. This will provide some ongoing relief for our margin. Looking forward, we are forecasting a fourth quarter margin in the range of 3.50% which includes a minimal level of PPP forgiveness. We are estimating to have loan accretion of approximately $630,000 and estimated PPP loan fee accretion of $1.8 million.

Moving on to Slide 13, operating noninterest income. Now this is a very energizing slide for us. We had another great quarter of operating noninterest income. We achieved increases of over 18% from the prior quarter and over 88% increase when compared to the same prior year quarter. Our service charges increased $183,000 as this quarter represented a more normalized level of consumer activity. Our interchange fees increased $360,000, but did include a vendor credit of $130,000.

For our mortgage banking team, we had another strong production quarter. Our mortgage banking revenue reached over $1 million, an increase of over 10% from the prior quarter. As we still have a strong pipeline, we will be estimating slightly lower levels of production looking forward into Q4. Our team will continue to focus on increasing and diversifying our noninterest income revenue streams. Looking forward, our forecast for the fourth quarter is having noninterest income of $3.8 million.

Turning to Slide 14, you'll find our operating noninterest expenses. We continue to find opportunities for expense control. In comparison with the prior quarter, our expenses were slightly elevated, with many of these increases expected. When comparing our operating expenses with the prior quarter, our salary and employee benefit expense increases were related to the lower reported amounts for the second quarter relating to salary deferrals from the PPP loan originations. We did see an increase in FDIC insurance, primarily from our overall asset growth during the quarter and look forward to having some expense relief for the fourth quarter from the decrease in assets related to the payment of the PPPLF. For our other real estate and loan-related expenses, we did have increased loan-related activity, but the majority of the increase was from a new outsourced appraisal program, and we realized timing differences of expensing versus reimbursement. We should see those expenses come back in line going forward.

Looking forward, our forecast for the fourth quarter is having noninterest expenses remaining relatively flat, with salary and benefit expense of approximately $11.1 million. Also, well let's touch base on taxes. In addition, our income taxes for the current quarter reported an effective tax rate of 23.5%, and we are forecasting that same rate for the fourth quarter of 2020.

Our next slide, 15, is details on our deposits. But this page doesn't give justice to what our team has accomplished during 2020. On the bar chart to the right, you'll see that our growth in deposits, which are up over 29% since year-end. In addition, since year-end, our noninterest-bearing deposits increased over $300 million or over 83%.

Now let's focus on the current quarter. We had a huge core deposit growth quarter. Our overall net deposit growth for the quarter was $112 million. Let me explain that further. During the quarter, we decreased our broker deposits by $78 million so our actual core deposit growth was $190 million, a very big funding quarter. At year-end 2019, our book deposits comprised 13% of our total deposits. Fast forward to September 30, we were at 3% of total deposits. Our team is very excited that we were able to reduce our reliance on broker deposits in such a short period of time.

The lower left graph gives a good depiction of our continued efforts in reducing our deposit costs towards the Fed funds rate.

With that said, I'm handing over the slide to Rhett Jordan, our Chief Credit Officer, to go over loan and credit-related info. Rhett?

Thank you, Ron, and good morning. Our loan portfolio maintained a very consistent overall profile to second quarter results, with outstanding balances relatively flat, and the overall portfolio mix being practically identical in segmentation to second quarter. Overall, the bank saw a very minimal $4 million or 0.16% decline in outstanding balances at quarter end. While growth in balances was flat as noted, loan demand has begun to recover strongly across our entire footprint as our markets are open and our COVID-related restrictions are minimal and continuing to ease across the bank's geography.

Tourism markets saw very strong demand throughout the summer months, and our overall portfolio continued to demonstrate stable and steady operating results through the quarter. All in all, a nice quarter with stable performance in the loan book.

Our overall credit quality metrics continued to perform extremely well through the third quarter. Our nonperforming asset ratio declined 0.10% to its lowest level in the last several years at 0.18% of total assets, as Billy mentioned earlier. This was achieved through reductions across each segment of the NPA asset base and other real estate, past dues and nonaccrual loans.

Net charge-offs for the quarter were 0.01% and continued to track below peer group averages. The over 30-day past due ratio saw its lowest point since 2017 at 0.25% of total loans. Also during the quarter, we performed a credit review of every loan transaction over $1 million in the portfolio and came away with an even stronger positive outlook on the soundness of our loan book. Overall, our asset quality continued to demonstrate very strong metrics and maintain a continual improving trend.

As you'll see on Slide 18, probably the most significant positive change we saw in the quarter was the downward progression of our modified loan portfolio. As you may recall, at the end of second quarter, approximately 25% of our overall portfolio or $615 million in outstanding balances had received and were in some stage of a modified payment structure due to the COVID event. That was very near our peak of modified loans, and we have seen a continual decline in that figure since then, culminating with a September 30 outstanding modified portfolio balance of $232 million or 9.7% of the portfolio, down nearly $400 million in balances and a little over 15% of the total loan portfolio. This progression was in line with our forecast from second quarter for modification expirations.

In addition, we finished third quarter with only $5.5 million in outstanding balances for loans where the modification was extended beyond the originally requested period, and we carry less than $50,000 in balances of loans where full payments are still being deferred due to COVID. We expect this trend to continue into fourth quarter months, and our overall modified portfolio will follow the forecasted maturity schedule that is noted in the deck.

Slides 19 and 20 show that our hospitality and restaurant bar exposures continue to be the larger segments of our modified portfolio. But those are down 61% and 56%, respectively, from their June 30 quarter end totals. They are forecast to reduce another $67 million by the end of this month as well. Much of this success has been driven by strong market demand in our core geographic footprint as our markets have been reopened since Memorial Day with minimal restrictions and clients are reporting steady traffic in their establishments. Our hospitality clients are indicating performance metrics still slightly below their 2019 year-to-date results. But the overall gap in year-over-year metrics is much smaller than where many had feared they would be.

Average reported occupancy rates for the summer months were approximately 61% in 2020 versus 78% for same period 2019, with year-over-year average ADR nearly flat for those months, a great trend. While this led to a RevPAR decline of about 27% year-over-year for the summer period, the overall cash flows for the majority of our operators are sufficient to cover operating expenses and debt service due primarily to manageable leverage positions held across the portfolio. Again, 2020, not quite as strong as 2019 year-to-date in hospitality space, but all things considered has been much better to date than expected.

Restaurant and foodservice clients are indicating a similar trend in that reduced capacity restrictions in some markets do still have a negative effect on revenue, but their dining traffic has still provided for adequate cash flow support. Quick service clients are reporting solid results, some even up year-to-date over 2019 levels in revenues and profitability due to strong demand for product and reduced operating costs as they have predominantly been drive-through only service since March in most of our markets. Casual dining clients have supplemented reduced capacity restriction with a more streamlined curbside touchless takeout setup while still seeing demand for in-location service with many reporting waitlist for tables and minimal year-to-date reductions in top line revenue. Some are even reporting improved year-over-year revenues through the last months.

As with hospitality, most of reporting revenue and profitability levels down moderately from same time frame in 2019, but significantly better-than-expected back in March and April and most importantly, sufficient to fund their operations.

On Slide 21, we cover our PPP loans. We booked 157 new transactions for an additional $7.7 million in PPP loan fundings in third quarter prior to the end of the program availability. This brought our total originations under the program to just over 2,900 loans totaling slightly over $300 million in balances. 1,877 or approximately 63% of our total PPP loan transactions will fall under the SBA streamline forgiveness process through the use of the Form 3508EZ process. This will be a significant benefit to resource allocation in the forgiveness and allow us to more rapidly move through these requests as borrowers with larger loan amounts begin to submit their applications over the coming weeks.

Approximately 98% of our PPP loan originations will have met their 24-week covered period by December 31. So we do anticipate an increase in forgiveness applications in the near term, but we are prepared to accept applications presently and we'll move through the forgiveness process expeditiously as those are submitted.

Now I will turn it back over to Ron to walk you through our allowance results for the quarter. Ron?

Thanks, Rhett, for all the detail on our loan portfolio. Now let's move forward to Slide 22, our loan loss reserve. As Rhett had indicated, our credit quality continues to be very strong. We continued our reserve build during this quarter with our allowance for loan losses increasing by $2.6 million from the prior linked quarter. Since year-end, our overall allowance had increased over 80% or $8.5 million, with almost all of these increases being directly associated with the economic qualitative factors caused by the COVID-19 pandemic.

On the shaded areas of the slide, I wanted to point out on the right-hand column that for the third quarter of 2020: one, our allowance to originated loans less PPP loans increased to 1%; and two, our total reserves to total loans, less PPP loans, increased to 1.61% at quarter end. We feel our overall allowance reserve coverage is at reasonable levels. Going forward, we will continue to assess the allowance and adequacy thereof as credit conditions change and record provision amounts as needed.

Slide 23 gives us information on our current capital position, very good trending information. Our tangible common equity, tangible asset ratio and leverage ratio are temporarily impacted by the significant increase in assets, and we anticipate these ratios to start trending upward over the next few quarters. Our CET1 and total risk-based ratios are back to near pre-COVID levels. All of our ratios are well above the well-capitalized benchmark.

With that said, I'll turn it back over to Billy.

Thanks, Ron. And to wrap, I'll give a little more color from my standpoint. As you heard Rhett discuss, we understand our loan book really well. We have made a scrub of the -- of really the portfolio with everything over $1 million, and we feel really, really good about where the credit is in our company. As we also spoke about, we continue to watch and talk with our clients and those relationship managers. But again, we feel very good about where we are as indicated by also noting that the NPA has dropped $3 million for the period.

Our markets are all performing well given the environment. As I've mentioned before, our smaller MSA model is well positioned for these current challenges with very few exceptions, our markets are operating their normal levels. We are knee-deep into our 2021 planning. Our near-term focus will be continued revenue growth and expense control, and we are back playing offense. I'll add, we continue to have success in converting a number of our new clients we picked up through PPP into core SmartBank clients.

Loan pipelines are building back. Had a great call with our RPs the other day. Really excited to see our pipeline starting to grow. I do think we will see organic growth in loan balances in the coming months, and we are still targeting the low to mid-single digits annualized numbers. I feel like we are positioned to handle the growth with minimal increases on the expense side. We'll continue to make strategic investment in staff that will grow the revenue line, but not a lot in other places other than just a few key technology investments.

I believe we're sitting in a really nice position given the environment. The energy in this company is as good as it's ever been, and our team is focused on taking advantage of the opportunities that we will have coming out of this cycle. We built a $3 billion bank platform with a strong loan book, and our noninterest income sector is beginning to scale nicely and diversify nicely. That's going to continue to be a big focus. We built our loan reserves for this uncertainty period, and we feel like we're adequately covered on that front, and we continue to build capital through our earnings story. It's an exciting time to be part of this company, and we are well positioned to be opportunistic in the future.

So I'll stop there, and we'll open it up for comments.

(Operator Instructions) And our first question today comes from Brett Rabatin from Hovde Group.

I wanted to first, I guess, talk about the margin guidance for the fourth quarter. Can you walk me back through the dynamics in terms of the expansion linked quarter in terms of what you're expecting from a cost of funds perspective slash -- I know part of it is probably liquidity going down somewhat. Can you just walk me back through the margin guidance in the fourth quarter relative to 3Q?

Yes, sure. The majority of the uptick was from the paying off of the PPPLF, not all of it were repaying 35 basis points for the funding, but we were getting 10 or less than 10 basis points on the excess liquidity. And we're talking pretty large balances and it really moved the needle, even though net-net, the net result dollar-wise wasn't that great, but the balances really skewed the margin favorably for us.

Does that -- and going forward, some of our -- we are looking probably around 5 to 7 basis points more of deposit cost-cutting from our -- some of our -- from the 15% of our time deposits being reset. So it's a combination, but the majority of the move will -- is stemming from reducing some of this excess liquidity on the balance sheet.

Okay. That's perfect. And then I wanted to make sure -- you made a lot of commentary about the modifications. I wanted to make sure, just looking at Slides 19 and 18 in particular, the second modifications are pretty minimal relative to the current modification. And so you've got the bulk of the maturities coming up here this month. I wanted to see if you had an estimate of the people that you've -- or percent of companies that you've talked to that are having their modification expire this month. Can you give us any color on -- does that $4 million number have any potential move -- potential upward movement as you get through the end of this month? Or can you give us some color around the modification expiration?

Yes. Rhett, you want to take that one?

Sure. I can. Yes, Brett, I would say that the -- we are -- as I mentioned, I think, in previous calls, I mean, we're touching each of these clients on a monthly basis as we continue to go through the balance of the year. The conversations we are having on a majority of these customers is that they do not anticipate having any issue with their modifications expiring and going back on payments.

We do -- we may have a client here or there that could request another interest-only period or something to that effect. We did have a couple of our clients that were impacted by the late season hurricane event down on the coast. So there may be a couple, but the total dollar amount is going to be minimal on the impact. So we really don't see a significant move in these forecasts from the standpoint of dollar figures on modifications as we go through the balance of the year. The expectation is still certainly by the end of the calendar year to be at or below that 0.2% or 0.3% number we're forecasting for December.

Our next question comes from Feddie Strickland from Janney.

So thanks for the breakout on the PPP loan side in the deck. I know we discussed last quarter the expectation that a significant number of the PPP loans could be auto forgiven if Congress passes that PPP forgiveness legislation we've been looking for a while now. Where are you today on the forgiveness process? And what's your best guess on where, when forgiveness could occur in the absence of maybe legislation?

Rhett, you want to jump on that one first?

Sure. Feddie, I would say, as far as where we are, we are prepared to accept and go through the process for forgiveness applications for any of our borrowers. We have the infrastructure set up to be able to accept applications, process those applications, submit them to the SBA. We have -- I think right now, we probably got 85 to -- somewhere between 85 to 100 applications that we have received that are in some stage of validation, for lack of a better word, through the forgiveness process. I'm sure, as you've heard from others, the forgiveness mechanism is -- requires a little more information to be provided by the borrower than the origination of the loan did, so we are working through a handful of applications now.

Certainly expect as we get into the fourth quarter, that those application process, those application numbers will increase. As I mentioned, a good portion of our applicants are going to be expiring their 24-week period in fourth quarter. So we do anticipate those numbers to increase. Of course, as you mentioned, the $50,000 or less figure is a significant help to us interior and just infrastructure-wise in the process you have to go through for those forgiveness of other smaller loans, so that will help tremendously. But certainly expect that number to increase and will certainly carry over into first couple of quarters of next year.

Feddie, this is Ron. I just wanted to -- what we're forecasting, and we apologize that this has been such a bouncing ball over the last few quarters, but we're looking for Q4, probably about 10% of the portfolio being forgiven as about $30 million, $35 million. Q1, about 50%, so that's $150 million and in Q2, $120 million. So we're calling the remainder in Q2. So we're kind of pushing this down the road, but that's kind of where our modeling is coming in. So we're looking -- we're still looking at Q1 to be a heavy forgiveness quarter based on -- I hate to say guess, but that's what we're looking at from a balance standpoint.

A lot of the work will start this quarter just through the end of the year than a lot of the dollars will be forgiven.

And the remaining fee recognition. Yes, sir.

[So it's] dependent.

Got it. Awesome. That's exactly what I was looking for. And then I guess just one follow-up to that real quick. I've kind of been thinking about as the PPP forgiveness rolls in, those dollars flowing into provision into reserve. But it kind of sounds like from your comments that you guys are pretty comfortable with where your reserve level is now, given the classified stable NPAs down. So should we expect a lower level of reserve build in the fourth quarter and going forward unless something changes on the credit front?

Yes. Feddie, we're continuing to monitor that. But I think your thought is pretty much right on. When you look at where we are from a credit standpoint, as Rhett and I have both mentioned, we have gone through and touched every loan in our portfolio of any size. We just don't see a lot of concern. I like where we are. I think we've got a good build, but don't see a lot of need to add much to that.

Our next question comes from Kevin Fitzsimmons from D.A. Davidson.

Just -- I definitely recognize the sizable ramp-down in deferrals or modifications. I'm just wondering with the -- in terms of the internal classification process at the bank are -- while those -- while we'll probably be using the word deferral or modification less often are -- some of these loans, particularly the hospitality or some of them going into special mention or have they already gone into special mention. I'm just wondering what -- I saw in your deck the classified levels, you said remain fairly flat. But if we look at something just either lowest grade of pass or maybe special mention or some of these loans getting funneled into their or have they already?

Rhett, do you want to walk you kind of the grading process and how we're viewing some of these as these modifications expire?

Sure, Billy. Yes. Kevin, what we did as our -- as we entered a modification with a client, we transition to that client into our watch classification internally, which is a pass grade classification, but one that is sort of like a holding sale, for lack of a better word, on a credit profile as we kind of keep a closer watch on it for a 6 month-or-so period. We moved 80 borrower that had done a modification into that watch classification. And as their modifications expire, we have been, as I mentioned, contact and these clients staying in touch with them about how their performance are getting updated financial information.

And when and where those profiles identify that we feel comfortable in their ability to come out of this modification cycle continue their payments, their company is performing well. We're transitioning them back to a nonwatch category. We've had very, very little creep out of watch into a worsened classified grade or criticized grade in our portfolio. The vast majority of our clients are improving throughout the course of the year. And so they're going all through the watch list back into a pass grade. And that's why, as I mentioned earlier, we're just not seeing that creep at this point into a deteriorating credit risk profile.

Okay. That's helpful. And just to drill another direction on this. Some companies have reported the same thing as you guys that deferrals are going down, but then there's almost a new category that where loans have -- they're not on P&I deferral anymore, so we're not reporting them that way, but yet we're taking some subset of these loans and doing something in the middle like interest only. So are there -- is there another layer of modification beyond the reported deferrals that isn't necessarily apparent that we should know about in terms of knowing what loans are paying fully on original terms and which ones aren't?

Yes. I would answer that to say that if you look at where we are as of quarter end, going into October, that 9.7% modified number, really all but about -- I think it's about $50,000 in balances are at least paying interest today and have been in recent months. Pretty much our payment deferral structures where the bars are basically paying no principle at all, the significant majority of those had expired almost through the July month.

So right now, the -- our modified payment structures are paying at least interest-only, and that's what is mostly is rolling off in the month of October, and we'll be going back to P&I payments in November. That 78.5% number of modified loans that are maturing this month, those are interest-only payment structures.

Okay, great. That's helpful. So the bulk of your modifications were still paying you something.

Yes, that's correct. And they have been now for the past couple of months.

Great. That's helpful. Just switching gears a little. Billy, I know you talked about getting back on offense. The stock currency probably doesn't support it at the moment, but I'm just curious what kind of conversations are going on behind the scenes. What one CEO mentioned that well, maybe M&A doesn't happen in the near term, but he can't remember a time when so many bankers are talking to each other just because of the common pain that's out there. And just wondering, are those kind of conversations happening? And do you think any of them yield opportunities to combine, which could provide some well-timed cost savings at a time when the revenue environment is challenging?

Yes, Kevin, that's really -- actually, it's a good way to put it. I think we're all looking to console each other during a time like this, but it's really -- and I'll let Miller speak to it as well, but yes, we -- yes, I think we're -- over the years, you build relationships with a lot of bankers. And so I think we're all kind of checking in with each other and talking about what's going on in their particular zones.

And so to answer your question, I think, yes, there's -- obviously, there's conversations going on where currency levels are today. Obviously, you probably don't need to anticipate here in the near term, but at the same time, you get a little bit of lift, and I think there could be some opportunities to do some deals that make sense for both parties. Again, probably yet to be determined, but we feel good. If we could get a little bit of lift, I think we will be ready if currency helps. I don't know any -- if you have any thoughts.

That's a great analogy in that probably more conversations now. Just general conversations catch up what you see and how do you feel, so to speak. But yes, I think it will be a pretty active market. We have continued to build those relationships, deepen those relationships, explore relationships and I'm relatively optimistic that if the market comes back to us and you'll see a pretty active '21 for the industry. So does that help?

Yes, that's great, Miller. And just on M&A broadly, do you guys feel any differently about it? Just with all the talk about the technology utilization of technology and branches being less necessary. Is it less needed to get those dots on the map and where you could go out and just hire a team? Or are you thinking about that opportunity any differently?

Yes. I will say, for the most part over the last couple of years, our M&A has been more scale focused and just trying to get to a certain size and have a little bit of density. Going forward, it will be certainly more earnings focused and does it move the needle metrics wise and technology and will certainly be important to this. Billy?

Yes. No, Miller, I think you've hit the nail on the head. Kevin, from our standpoint, he's right. And that's been our goal. We got up to this $3 billion platform, this is as kind of an interim goal for us to get to here now. I really do think with the work that we've got, Ron and the financial group doing and so many other groups doing in our company, we're really a hard pivot toward moving the financial metrics in the right direction. And that's where our focus is, again, revenue growth and expense control.

So a future acquisition, I don't think it is -- I think I probably feel less -- we never did feel pressure, but I think we feel probably less pressure now than we ever felt to really do the deals. If the deals are right, they make sense and they help those metrics, then we would look at them.

To your point on technology, I agree, I think it is -- yes, I think you do look at deals with every branch networks, for example, probably are a little less attractive. If you would want to have some -- you definitely want to have some scale in your branches to justify today because I do think the tech side is going to become more and more critical for companies like ours moving forward. And that's one of the reasons we put a big emphasis on it this year.

Our next question comes from Ammar Samma from Raymond James.

Ron, maybe a quick model question for you. Last quarter, you had the $1.9 million of fee accretion from PPP plus about $0.5 million of spread revenue. Do you have that spread revenue component this quarter?

I do. I do. We -- all in for the quarter, including the $1.8 million, we're at 3.29%. So basically is de minimis on really on the margin, the effects of the margin. It will go down next quarter. But -- so I think the prior quarter, we were in the mid-4s. So all in, that's where we're at.

Okay. And then the 3.50% margin guidance, that was on a reported basis, up to 3.39% this quarter?

The 3.50%? Yes.

Starting from the 3.39% base that had all the PPP and accretion in there, correct?

For fourth quarter, I don't have the number for exactly what it's going to do because of the payment of the PPPLF. But it will go down considerably. And I can get with you off-line to get in the details. I don't have that really in front of me at this point.

Okay. No, I appreciate it. Maybe a bigger picture question. We talked about the reserve quite a bit. Is management modeling any additional government stimulus? And should we get another round, is there a world where you can actually release reserves quicker than you may have anticipated?

I don't really know about release. I think we're probably in our thinking, we are probably thinking about just growing into them, is probably where our lean would be today. I think we've done a nice job of building at this point. We do have it growing. And so I think our thought would be just to kind of grow into any excess that we see in the coming quarters.

(Operator Instructions) Our next question comes from Stuart Lotz from KBW.

Maybe to rob one more question. I realize we're running pretty long here. But Ron, if we could go back to your expense guidance, this quarter, if we back out some of the merger charges as well as the kind of elevated OREO expense. I think you mentioned that you were expecting kind of flat expenses next quarter. Is that if we net out the kind of 2 onetime items, where are you shaking out, like around $18.5 million?

No, we're still going to shake out probably around the $18.8 million, $18.9 million range. We did have a quarter of kind of reduced professional fees and fourth quarter usually ramps up for starting the year-end reporting process. In our data process and due to our level, our thresholds and our contract, we will see a little uptick on that. So we have a lot of variability from line item to line item. There's nothing really specific but -- so we are targeting the $18.8 million, $18.9 million range. So really, again, flat with what we saw for this quarter, the third quarter.

Got it. And maybe just one housekeeping question. With the election coming up, I think we're starting to build out more scenario analysis where if we do get a tax increase. Obviously, you guys benefit from being in Tennessee state income tax. How are you thinking about potential -- where the new tax rate could shake out next year, if we do, in fact, get a higher tax rate?

Yes, obviously, we don't hire what would be. Ron, can you give any thought on that?

Yes. We talked about, it's not going to be good if it goes up. But no, we've not modeled that scenario, and that's a good point. Obviously, we'll know our modeling for our next earnings release and what we're going to model for. But no, I'm sorry, we didn't go to that extent at this point.

And our next question is a follow-up from Brett Rabatin from Hovde Group.

Just one follow-up on expenses. Just thinking about this year, it's probably a bit early to ask you about your budget for 2021. But if I'm thinking about the environment, a lot of banks are thinking more about slower expense growth and operating leverage and trying to manage expenses tighter. I'm just curious how you're thinking about kind of the next few quarters in terms of do you want to continue to add lenders and play offense, so to speak, in terms of potentially growing the franchise? Or do you think you'll manage more towards trying to improve profitability and going with the team you have, so to speak?

That's a good question, Brett. From -- it's probably a little bit of both. I think at the end of the day, we feel really good about the markets we're in, the zones we're in and kind of where we sit. So opportunities to add revenue producers, I think we would take them. And so we will probably continue to explore like we always have, to where we could add revenue producers in any of our zones from that standpoint.

But that said, there is a real strong focus on expense controls in our company right now. I think it's -- we started it this year. We've really done a nice job of the work that we've done, I think, is yet to be seen as we get through renegotiations of contracts and again, keeping that noninterest expense line at a very, very level spot moving forward. So I think it's a little bit of both. And I know some banks are probably shifting to a little more of a defensive posture. That's not us. We're going to -- we want to stay on offense, but with a keen focus on expense control. So I don't know if that answers your question, but it's probably a little bit of both sides.

Okay. No, that's helpful. And then one other one, this one, just I guess, while I'm on the phone. I know the goal is kind of low to mid-single-digit loan growth. And obviously, the demand has been probably a little tepid. Can you maybe just give us a little color around pipeline versus payoffs so we can maybe get a better flavor for what you're currently seeing in terms of the portfolio?

Yes. I think just kind of looking on a net basis, factoring in anticipated payoffs and paydowns, we're -- it again, varies. But I think we could potentially see somewhere in the $20 million, give or take range as far as net balance growth over the next few months. I think that's probably reasonable.

When we look at it, we try to run our pipeline with probability of closing compared against payoffs -- projected payoffs and paydowns. When we run that number today, we feel pretty good that we've got some balance growth coming over the next several months. And you can always get surprised with the payoff or something like that but -- that you step back from. But what we're seeing now, I think we can probably pick up somewhere in the neighborhood of $20 million, give or take in net balance growth.

And we do have an additional follow-up from Feddie Strickland from Janney.

Sorry, I know we're running late, so I'll be quick. Just wondering, I know fee income was really good this quarter mainly due to mortgage, but also due to interchange fees. I guess just how is mortgage looking so far? I know we're only a month in. And then is there any kind of seasonality in those interchange fees or, I guess, any other component of fee income?

Ron can dive in a little bit deeper, Feddie. But yes, I think mortgages -- in talking with our mortgage production team prior to the call, I think we feel like we'll have another solid quarter based on pipelines. So I think it will be comparable to where we are and having Ron's modeling slightly lower just in a total revenue on that -- in that division, but not much. I think it should be pretty steady interchange. And Ron, I'll let you speak to that, that we had a little bit of a vendor credit in there.

But I also think what we're seeing is the inflow of a lot of good consumer accounts off of our last acquisitions, the progressive acquisition yielded a lot of really good consumer accounts for us. Those folks are spending and those interchange fees, that volume is driving. So while probably a little elevated for that one time, this quarter, I think our trend should be higher overall.

Yes. I think that we probably will have some seasonality to it. But I think if you come off the holiday season, that will bring us into January. January should still be elevated, February, March maybe slow down a little bit. But net-net, we're probably looking at or close to -- up and down, we're looking -- we're probably looking at for what we had for third quarter, that's $130,000. So I think we're in the $700,000 range for the fee income going forward in this line item. So even though we have seasonality, but I think it's offset by the highs and lows. And then March, second quarter picks up the busy seasons again.

But as Billy indicated, our last acquisition brought a lot of sustainable interchange revenue because they were more retail-based. So that really pushed the seasonality to side a little bit. And we have more of a core repeatable process for the revenue generation there.

And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over for any closing remarks.

In closing, let me say thanks again for your time today and for your interest in SmartBank. You know as well that we're working every day to increase shareholder value, and we appreciate you being part of the process. Have a great rest of your week. Thanks.

And ladies and gentlemen, with that, we'll conclude our conference call today. We do thank you for attending. You may now disconnect your lines.